Analysts concerned over Petronas’ ability to pay dividends

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KUCHING: Analysts outline concerns over national oil and gas player Petroliam Nasional Bhd’s (Petronas) dividend payout plan in light of the group’s results for the second quarter of the year (2Q16).

Kenanga Investment Bank Bhd’s research division (Kenanga Research) reckoned that Petronas may need to conserve more cash through higher cost savings or even at the expense of deferring further capital expenditure (capex) if Petronas remains committed to the RM16 billion dividend commitment, given that it has no intention of raising debt at this juncture.

“That said, we would probably see stronger opex-related contracts award such as the Pan Malaysia transportation and installation contracts and subsea IRM for both Peninsular Malaysia and East Malaysia in 2H16,” it said in a report yesterday.

“While flattish oil prices will cap the sectors’ valuation, we advocate investors to be nimble and selective and look out for strong contract flow as firm earnings recovery indicator.”

Hong Leong Investment Bank Bhd (HLIB Research) took comfort from the fact that Petronas’ 1H16 operating cash flow of RM25.6 billion is sufficient to cover for its capex commitments.

However, the group is still required to pay RM16 billion worth of dividends for its shareholders.

“With RM6 billion already paid, the group may opt to draw from its huge cash coffer of RM112 billion as of the last reporting date to fulfil the additional RM10 billion worth of dividend payments – this is still a manageable level for the group given its strong net cash position,” it highlighted.

“However, we opine that this could only be sustained for another foru or five years before its cash balances dwindle to a more worrying position.”

Despite Petronas registering a 10 per cent drop in its core net profits after tax and minority interest (PATAMI) for the first half of 2016 (1H16), analysts remain optimistic for the group in 2H16 as it espects more contracts coming into play.

Petronas’s 1H16 report card saw its core earnings falling 10 per cent year on year (y-o-y) to RM17.6 billion from RM19.7 billion in 1H15, dragged by lower averaged realised product prices and lower crude oil and condensates, processed gas and petroleum sales volume but offset by better cost efficiency.

Stripping off total net impairment of RM9 billion, Petronas’s PATAMI improved by 13 per cent to RM9.4 billion from RM8.3 billion in 1Q16, largely attributable to better crude prices and better cost efficiency.

On an annual basis, Petronas’s core PATAMI dropped by seven per cent from RM10.4 billion due to lower average realised prices recorded across all products and lower crude oil and condensate, processed gas and petroleum products but was partially offset by a weaker ringgit in the second quarter of 2016 (2Q16).

Cumulatively, Petronas’s core PATAMI weakened 10 per cent y-o-y to RM17.6 billion in 1H16 from RM19.7 billion in 1H15 on similar reasons, but this was largely offset by the cost saving impact arising from continuous cost optimisation measures.

HLIB Research added that the resilient numbers posted by Petronas would no doubt provide a positive sentimental lift in the stock market.

“However, we believe that the service players — especially asset players such as offshore supprot vessels (OSVs) and rigs — would not see a significant pick up in activities as we expect Petronas to maintain its current activity level to conserve its cash,” it forewarned.

“OSV and rig players are still in the oversupply situation, particularly higher-end OSV and jack-up rig segments,  with significantly more than enough capacity to cater for the demand at this juncture.”

Overall, Kenanga Research  believed Malaysia should be able to maintain its budget deficit target at 3.1 per cent of Gross Domestic Product, given the year-to-date average oil prices of US$42.4 per barrel which is higher than the crude oil assumptions of US$30 to US$35 in the revised budget early of the year.